CREDIT SUISSE: UK markets could boom if the Tories win a surprise victory like in 1992

John Major's surprise victory in the 1992 election buoyed markets.
Reuters
Credit Suisse just released a note on the upcoming UK election, with one basic line: They reckon the chances of a 1992-style swing to the Conservatives at the last minute are higher than pollsters are projecting.

During the 1992 election Labour leader Neil Kinnock was leading in pretty much every poll, sometimes by double digits. But on the day, people came out to vote for what they knew — Prime Minister John Major and the Tory party.

Here's the Credit Suisse research team's view:

We expect a 45% probability of a Conservative minority (vs polls implying 35%) and a 40% probability of a Labour minority (vs polls implying 48%). These expectations are based on: the experience of the 1992 election, when polls swung in the week before polling day; the personal approval rating of David Cameron and the loss of support for UKIP.

Based on the current polling, only coalitions involving Labour and the Scottish National Party really work. But Credit Suisse has a different set of expectations, laid out in more detail:

Credit Suisse
The note also demonstrates that a surprise Conservative victory in 1992 boosted stocks — on a 30-day basis the FTSE 100 outperformed global markets by 10.5%.

Here's Credit Suisse again:

Historically the FTSE outperforms in the month following the election by 5% if Conservatives win, but underperforms by 1% if Labour wins...

Under a Conservative minority government, we see 7,400 FTSE year-end. Under a Labour minority government, we would forecast 7,200 FTSE year-end. Our central view is 7,300 FTSE year-end.

In contrast, the FTSE was particularly shaken by the indecisive elections in 1974, the first of which returned a Labour minority government, and the second of which returned a small Labour majority.

Credit Suisse

There are two potential market-wobbling referendums threatened by different results — if the Conservatives lead the government, they'll want an EU referendum that the authors think could delay international investment into the UK. But if the Scottish National Party are involved in a Labour-led government, they may want a referendum on independence (again).

What's more, they think the pace of rate hikes at the Bank of England could end up being significantly different under different governments:

We think that the key difference in the election outcome for monetary policy and for sterling is not so much on the timing of the first rate hike, but more the pace of tightening. We believe that, under a Conservative majority or a stable coalition, fiscal policy will be tightened to align the economic cycle with the political cycle (though less so if there is a minority government backed up by an informal coalition with the Liberal Democrats and the DUP).

However, a Labour-led government is likely to pursue a much looser fiscal policy (not least because infrastructure spending will not be included in the arithmetic to balance the budget and the SNP is anti-austerity). Additionally, we see a high probability of increases in public sector wages (with 72% of Labour funding coming from the Trade Unions), as well as a rise in the minimum wage (which Labour plans to increase to £8 per hour by 2020, from £6.50 currently). In such an event, we think that the pace of monetary tightening would be faster. Our Head of European economics, Neville Hill, believes that under a Labour minority government the UK policy rate would be 1.75% at the end of 2016 (compared to a forward curve predicting 82bp) against 1.25% under a Conservative minority government.

The difference between 1.25% and 1.75% may not sound like a lot, but with interest rates still at 0.5%, where they've been for the last six years, any upwards move is going to be a massive event.